Request By:
Mr. John McD. Ross
Director
Tax Compliance
Ashland Oil
P.O. Box 391
Ashland, Kentucky
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You have raised the question as to the circumstances under which the crude petroleum tax of KRS 137.120 may be constitutionally applied by fiscal courts. You have asked us to reconsider our earlier opinion (OAG 78-396) in which we concluded that it was an excise tax, and thus a county could not constitutionally apply it.
KRS 137.120(3) permits any county to impose a tax "of not more than one per cent (1%) of the market value of all crude petroleum produced in the county" for county purposes.
A county, under § 171 and § 181 of the Kentucky Constitution, can levy only two kinds of taxes: (1) ad valorem taxes and (2) license or occupational taxes.
Driver v. Sawyer, Ky., 392 S.W.2d 52 (1965). The question is whether the above statute, KRS 137.120(3), as relates to the county tax aspect, can be sustained as a license tax, since obviously an ad valorem tax is not involved. You say that approximately 61 counties are imposing the 1% tax on production of crude petroleum under the statute. You point out that on a county-by-county basis the loss of such revenues could have a significant detrimental effect on the fiscal posture of many of the counties involved. You also indicate that the unsettled view of the statute has produced problems for transporters of crude petroleum, including Ashland Oil and others. KRS 137.140 requires the transporter to collect the tax from the producer and pay it over to the state and county, as appropriate. In the event the transporter fails to collect the tax, he is held liable for its payment.
You would like for this office to remove, if possible, this cloud of uncertainty.
THE TAX CAN BE SUSTAINED AS A LICENSE TAX.
The determination of the character of a tax is described in 84 C.J.S., Taxation, § 3b, pp. 40-41:
"The character of a tax depends on the legislative intent, as expressed in the statute imposing it, and, in determining such intent, the practical operation of the statute and its actual effect are persuasive circumstances. However, the substance of the statute, the natural and legal effect of the language employed, and the incidents and attributes of the tax control, rather than the name given to the tax by the legislature, although the legislative designation is an important factor in determining the question. The purpose of giving a designation to a tax as being a tax on persons, property, or rights and privileges, is to determine if there is a limitation or restriction in the constitution on such a designated tax."
If the tax in question is levied under a county ordinance as a license tax on oil producers engaged in the business of oil production, even though it is measured in terms of a percentage of the market value of the crude oil produced during the tax period, we are of the opinion that the tax would be construed and upheld by the courts as a license tax. We are speaking in terms of the tax being imposed upon any person, firm, corporation or association engaged in the production of crude petroleum. See
Raydure v. Board of Supervisors of Estill County, 183 Ky. 84, 209 S.W. 19 (1919). Thus a prototype of KRS 137.120 was upheld in Raydure, above, under § 181 of the Constitution as a license tax on the business of engaging in the production of oil. In
Swiss Oil Corp. v. Shanks, 273 U.S. 405, 71 L. Ed. 709 (1926), the Supreme Court of the United States was willing to accept the Kentucky court's interpretation of the statute [earlier form] as a license tax, and saw no constitutional objections.
In interpreting an earlier form of the statute, in
Cumberland Pipe Line Co. v. Commonwealth, 228 Ky. 453, 15 S.W.2d 280 (1929), the court wrote that "It is no objection to the validity of the legislation that the amount of the tax on the producer is measured by the value of the thing produced." (Emphasis added). The court said the tax is measured by the market value of the product at the place of production.
While a 1948 amendment of KRS 137.120 was entitled "An act relating to taxes upon production of crude petroleum: State and County, amending KRS 137.120", and thus the previous title relating to "a license tax on business" was changed as described, we do not believe this language change in title is sufficient to base a conclusion of legislative abandonment of the license tax concept. For if the legislature intended to shift the tax from one of license to excise, then it intended an unconstitutional purpose. The appellate court has said that it is never presumed that the legislature did a vain thing.
County Bd. of Ed. of Daviess Co. v. Fiscal Court of Daviess County, 221 Ky. 106, 298 S.W. 185 (1927).
Of course the constitution does not authorize a county to levy an excise tax as it is understood in its narrow meaning of a tax put on a commodity for revenue purposes. See
City of Lexington v. Motel Developers, Inc., Ky., 465 S.W.2d 253 (1971).
You note that in OAG 78-396 we relied upon
C.C.C. Coal Company Inc., v. Pike County, Ky., 536 S.W.2d 467 (1976) in concluding that the county tax imposed under KRS 137.120 is an excise tax. You suggest the use of the Pike County case was too narrow. We agree. In that case Judge Lukowsky pointed out at page 468 that "The Pike County coal tax is not levied upon engaging in the extractive business enterprise of coal production. In this case, receiving and/or processing coal for distribution is not an independent trade, occupation a series of event which occur or profession. It is but one of a series of events which occur in the business of production. Therefore, this is not a license tax laid upon a trade, occupation or profession. It is an attempt to levy a license tax on but a single aspect of a trade, occupation or profession. " Thus, as you say, the court in the Pike County case would probably have upheld the tax if it had been carefully drawn such that it would clearly appear that the ordinance involved a license tax imposed upon coal producers, and would have thus satisfied § 181, Constitution.
As the court said in City of Lexington, above, the label is not controlling. The significant point is whether the tax is actually a license tax imposed on trades, occupations or professions.
AN EXCISE TAX DISTINGUISHED.
Historically the word "excise" has had a general meaning, and this broadness has caused the courts some difficulty over the years. The word came to have a broad meaning and included every form of taxation not a burden laid directly on persons or property; in other words, "excise" included every form of charge imposed by public authority for the purpose of raising revenue upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation. It also included the idea of a fixed charge laid on merchandise, products, or commodities.
State Taxing Commission v. Hughes Drug Co., 219 Ky. 432, 293 S.W. 944 (1927) 945. Thus the courts recognized, in defining the term "excise tax" , this admixture of a tax on a commodity and the license tax aspect. Syllogistically, a license tax is an excise tax under that general definition, but all excise taxes are not license taxes, since an excise tax could be merely a tax on a commodity for revenue.
A MERE TAX ON PETROLEUM WOULD BE AN EXCISE TAX, CONSTITUTIONALLY IMPERMISSIBLE.
However, it is evident that where KRS 137.120(3) is applied such that the tax is merely a tax on the commodity, petroleum, or is a tax upon the sale, use or transfer of such petroleum, and nothing else, such use would be unconstitutional under the terms of § 181 of the Constitution.
As we said above, if the county ordinance is so carefully drafted as to reflect a tax on the petroleum producers, as an occupation or calling, even though the license fee is measured in terms of a percentage of petroleum produced, it stands as a license tax. The right to levy a tax on trades or occupations is not a tax on the "right to work or do the things but the doing of them in fact."
City of Louisville v. Sebree, 308 Ky. 420, 214 S.W.2d 248 (1948) 252.
SUCH A TAX ON THE PETROLEUM PRODUCERS MUST BE INTEGRATED WITH A GENERAL COUNTY OCCUPATIONAL TAX.
Of course, the petroleum tax as applied to oil producers must be fairly and equitably integrated with a general county occupational or license tax applying to occupations, trades and professions generally. Thus such an overall occupational or license tax must be based upon reasonable classifications, must not be discriminatory, and must not be arbitrary or confiscatory. Such an overall license tax must be uniform as applied to each classification. See § 171,
Kentucky Constitution and City of Lexington v. Motel Developers, Inc., Ky., 465 S.W.2d 253 (1971) 257; and
Jahr v. City of Radcliffe, Ky., 503 S.W.2d 743 (1973). We have above pointed out that the general license tax, in integrating this petroleum tax applied to oil producers, can measure the tax in terms of a percentage of the market value of crude oil produced by the particular producer during the tax period. We think this 1% tax on petroleum producers, as a part of a general license tax, is uniform within that class, and is not excessive, arbitrary or prohibitive.
Baker v. City of Corbin, Ky. App., 556 S.W.2d 449 (1977) 450. See also 36 Ky. L.J. 357, dealing with constitutional uniformity, by Dean W. L. Matthews, Jr.
CONCLUSION
Under the foregoing analysis and reconsideration, we are of the opinion that the statute is constitutional, and the constitutional use of the statute must embrace a tax levied on the petroleum producers, who are engaged in business of the production of crude petroleum, as a part of a general county occupational or license tax. OAG 78-396 is withdrawn.